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Bankruptcy Reaffirmation Agreements: What Are They And How Do They Work?

Usually when a debtor seeks bankruptcy relief, particularly Chapter 7 bankruptcy relief, a debtor is seeking to eliminate or reduce one's oppressive debt obligation as much as possible. Sometimes there may be critical assets that you wish to keep (usually a vehicle). A reaffirmation is an agreement to continue paying on a particular asset following a bankruptcy discharge. The creditor in turn agrees that as long as the installment payments are made that the creditor will not repossess the property. It can be very tempting to enter into a reaffirmation agreement to keep a useful asset such as a vehicle, but this is a decision that can have significant long-term consequences so you should seek legal advice from a qualified Southern California bankruptcy attorney before deciding to reaffirm any particular debt.

The issue of reaffirmation of a debt that is secured by collateral typically arises in the context of a motor vehicle or occasionally a business vehicle financed with a personal guarantee. Because most families' need daily access to a vehicle for personal or business use, many debtors will choose to reaffirm the debt. However, a person only gets one bite at the Chapter 7 bankruptcy apple. If you reaffirm a secured debt but are unable to make the payments, the vehicle can be repossessed. Unless a very sizeable down payment was made, a financed vehicle will typically be worth less than is owed, and the creditor may sue you for the difference between the value of the vehicle and the amount owed ("deficiency judgement").

Another consideration in signing a reaffirmation agreement is whether the negative equity in the vehicle makes it advisable to reaffirm the obligation. In most situations, an asset like a motor vehicle will be worth less than is owed if it is financed. If the vehicle is worth significantly less than is owed on the vehicle, it may not make economic sense to reaffirm the obligation. The bankruptcy trustee will also look closely at a proposed reaffirmation to determine that it does not create an unreasonable financial burden on the debtor and his family and to verify that it is a fair transaction. It is very important to carefully consider any proposed reaffirmation. The experienced bankruptcy attorneys at Shakoori Law Group will advise you of your rights as well as the benefits and disadvantages of a proposed reaffirmation so that you can make an informed decision.